YOUR EBOOK TITLE THE NEW CMA: COMPETITIVE NOT COMPARATIVE
I ssue # 3: Market movements. The market is rarely, if ever, “stable.” What we mean by stable here, is that home values are neither increasing or decreasing. If we lived in a bubble and home prices weren’t reliant on interest rates, inflation, or future’s market on commodities, then this could happen, but that’s not the truth. Traditional pricing methods, especially price per square foot , compare recent sold properties and establish “value.” However, the main fault in this idea is you’re still trying to price in today’s market using the price of something that sold often months ago. Can you imagine buying a car based on what it sold for six months ago? Do you get to go to the gas station and buy fuel for what it was 6 months ago? I don’t know about you, but I’d love to buy shares of Tesla or Apple for what their value was in the past! So, because prices and values are changing we are almost always led astray using price per square foot, with the exception of pure luck.
Pricing Model #2: Absorption Rate Pricing
Absorption rate pricing works by taking the number of homes sold over the last 12 months, 9 months, or 6 months, then doing a basic division. Thus, giving you the number of homes selling per month (i.e. the absorption rate). Then you can look and say, if there is an absorption rate of 2 homes per month in your area and if you want to sell in the next month, you need to price to be one of the 2 best values in your perspective. Absorption rate pricing can only work when there’s a couple of situations or a couple assumptions that must be true.
ASSUMPTIONS THAT MUST BE TRUE
Assumption One: There is no seasonality. For absorption rate pricing to work correctly you can’t have fluctuations throughout the year when a neighborhood sells a lot and when it sells a little. It has to be equally distributed as far as home sales throughout the months to make sure or to make the calculation be absolutely correct. (Now there are some areas that are very close to this, mostly along the coasts. Coastal areas have a lot less actual seasonality, less winter, fall, spring, summer fluctuations.) Their economic and environmental effects are less, so this can be very close to being true. However, in many cases, especially where we’re based in Colorado, there is very much seasonality and change between January sales and July sales. So often, this assumption is wrong. Another seasonality in the market you have to assume is not happening, is a change in the market. Absorption rate pricing works only when there are no interest rate changes affecting demand, period of appreciation growth affecting supply and no governmental actions that cause ripples in the real estate environment. Not surprisingly, this assumption is rarely held up. Assumption Two: Area matters more than price range, or vice versa. The absorption rate pricing calculation is based off the number of homes that sell in a certain area during the time period. What this means though is that you are looking only at the area, you’re not factoring in other areas that have homes for sale that could take a home sale away from you. Again, using the buyer’s zone as mentioned earlier. Even if you are doing the absorption rate pricing math on a price range, not area, then you’re still missing out on your area in particular. For the math to work right, we must assume that either area or price range competition doesn’t matter. That rarely is true.
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